QE3 Fondue

Wednesday, August 17, 2011

So the SNB didn't hit the button on a floor for EURCHF in the end, though the fact that it is still "out there" in policy circles probably means that the disorderly one-way appreciation of the Franc that had been seen in recent weeks. The battle appears to have been won this time, but it will take a while to see whether the war has been won. TMM suppose that the Cantons are still reluctant to increase their investments in SNB LLC given it is on course to produce two down years in a row.

But the money market measures announced and enacted have been exceptionally aggressive, taking on a new level of intervention in the FX Forward market and driving 3m implied rates as low as -1.5% (see chart below). Now, this obviously is intended to provide something of a barrier to speculative longs in the Franc, but as many have noted, much of the move has been due to capital flight from the Euro periphery and Switzerland's running of something like a 15% Current Account surplus which had previously been intermediated and recycled by UBS et al...

...who have been shrinking their balance sheets since 2007:

However, in forcing the cross-currency basis so negative, the SNB are either unintentionally (or for the tin foil beanie brigade, *intentionally*) providing a mechanism to force the Fed's balance sheet to involuntarily expand... QE3 by stealth?!

TMM are, of course, talking about the impact that highly negative rates in the FX Forward market have upon the Fed/SNB FX Swap lines. It seems that Swiss banks can borrow USDs from the SNB/Fed FX Swap facility at around 1.1%, which means that as implied CHF rates fall below around -1.1% there is an arbitrage which when accessed will result in an increased supply of USD and expansion of the Fed's balance sheet. Given just how aggressive the SNB have been on their intervention, they are providing a significant incentive to Swiss banks to engage in such a strategy. TMM wonder how happy the Fed will be with such an expansion, though they would note that it requires no additional policy actions on their part. Something, perhaps, Ben will be pleased with given the recent vitriol spouting from some of the Republican contenders.

On a related note, TMM have noted a lot of commentary on EuroSwiss 3m Libor futures trading above 100 (See chart below). This is something that perplexes them somewhat, because back when they learned about the Eurodollar market and its origins, they remember being told that such deposits were "offshore" and therefore not subject to domestic regulations (with respect to USD deposits in the early-1980s , these were interest rate caps etc). The result was a significant difference between domestic rates and offshore rates - something that EM traders will instantly recognise.

This was one of the original drivers behind the introduction of the basis swap market and, indeed, the USDCHF 1yr basis (see chart below) has begun to move negative in earnest and following on from the recent money market actions. But markets have never really approached a point where rates have been so close to zero that onshore/offshore effects are so dramatic. Japan never saw 3m Libor go negative (offshore) nor 3m Tibor, though the FX Forward market again saw negative rates (again, a cross-currency basis effect). And TMM find it hard to imagine an offshore deposit transacting at all at a negative rate given there isn't really a mechanism for it to do so - though they do accept that it is plausible that money centre banks might impose depository charges independently, this seems particularly unlikely given that reserves at overseas subsidiaries of bank holding companies do not (as far as TMM are aware, count towards regulatory limits domestically - please let us know in the comments if we are wrong on this one!). Finally, TMM also are sympathetic to the idea that given the banks on the Libor panel for CHF, that they might collude in some manner to produce negative Libor, even if they were not actually transacting deposits at such a level. However, TMM reckon that given the uproar last time there were questions regarding the accuracy of the Libor fixes, that these banks might not want to open themselves up to further political and regulatory pressure.

That said, TMM are sure plenty of swaption desks are short 0% strikes and prices may merely move higher on their "hedging" activities, and thus it is hard to stand in the way of the train, even if they are relatively (though not completely) sure that 3m CHF Libor won't go negative and at expiry the trade would most likely pay off.

Other than that, TMM don't really have much of an opinion on markets at these levels, as we seem to be hovering around pivot points in Spooz, the Euro and pretty much everything else. The hard data (notably IP yesterday) seem to have generally been OK-to-good, but the soft data (Empire etc) have taken a further turn down, so it is hard to see the wood for the trees. But TMM do hold the view that as volatility decreases, it will not be long before the carry monkeys start to pick up some bargains.

Posted by cpmppi at 11:13 AM  


Excellent blog post ...
Market seemed a tad disappointed that the SNB didn't mention a peg this morning.

Nic said...
1:11 PM  

"But TMM do hold the view that as volatility decreases, it will not be long before the carry monkeys start to pick up some bargains."

Exactly. LB will also offer today that VIX peaks are always followed by: The Louise Yamada Indicator.

This always accompanies H&S in VIX and a reverse H&S in stocks. Louise media sightings are always a BULLISH short-term sign.

See also: the ROSIE WAS RIGHT ABOUT BONDS indicator. Another indicator would be appearances by NOURIEL ROUBINI and GARY SHILLING. Also bullish. Why? B/c these bears are always brought out ex post facto...

Beware though, this is usually good for a few weeks only before the media trots out the BULL IS BACK and then well, you know the rest....

Leftback said...
4:12 PM  

You do have to admit though, Rosie kind of was right about bonds, wasn't he?

Dublin Dundee Humberside said...
4:29 PM  

I guess the bulls are pressing their luck for a return to 1250...

Anonymous said...
4:41 PM  

I'm surprised we havent mustered more of a comeback to 1220 or 1250 in the Spoos.. maybe in a couple of weeks

listening to roise makes you feel smart but not participating in a bull market in stocks when companies are crushing it makes me feel even more stupid.

he's a great economist but he cant make any tactical/short term calls that would help over the next 3-6 months

abee crombie said...
5:59 PM  

best comment ever:

"listening to roise makes you feel smart but not participating in a bull market in stocks when companies are crushing it makes me feel even more stupid."

After having read the report for years, it eventually had to sent to my recycle bin for this reason alone.

Anonymous said...
6:53 PM  

'C from C' says' my friend are going to a Gerard Depardieu moment ..that is,you're going back to the departure lounge if you think that what was will be again very soon,or in his case if you're only as good as your last film 20 years ago then it cuts no slack .

Equities are making no progress except on a relative strength basis. To go appreciably higher this is not good enough it needs broad sector particpation for that. However,after a trend change of course relative strength becomes du jour does it not ?.

I am sorry ,truly ,but if I have to rely on 'bear spottings' to make a long play it is time I retired.
Forget this nonsense,is the world slowing or is it expanding? Can the majority of businesses thrive ,or struggle? Can they repeat and improve on historically high earnings or not? Does this sound like a combination of events that you should buy meaningfully?

Please I implore you,nay I beg you ,do not do a Gerard ,keep your piss intact so we do not have to say adieu mon ami.

Anonymous said...
7:06 PM  

Its a bit of a dull day, even for Cheltenham. Yeah, we love Rosie's commentary but he is a great trading indicator of the contrarian variety.

Chill out, Chelts, it's all about the next few days. If the bulls push this up into expiration we'll be bagging some profits and saving our liquidity. Unlike Gerard...

Leftback said...
8:17 PM  

"Huge rodent seen in waterworks"

Bit of a day for dullness really.
Could've been a blinder if it had toothache.

ntwsc said...
11:33 PM  


"it's all about the next few days"

Theirin is your problem mon ami.
The next few days is only noise,but you appear to think it is macro?
I leave you to be educated.

Anonymous said...
6:46 AM  

In the past it has been my great fortune to have made the acquintance of ATTAC partisans on different occasions. One was struck, not by the idea itself, but rather that it was possible to assemble such an militant and fanatical movement ostensibly around the promotion of one obscure tax.

Add to intrigue that the eponymous James Tobin supports "everything that these movements are attacking" as he states in a Der Spiegel interview titled "They Are Misusing My Name."

The founder of ATTAC is an avowed socialist and the only authorized biographer of "comrade" Fidel Castro, who he praises for having left a legacy of resisting "the world’s greatest empire.”

It was been a startling surprise to see ATTAC's vaunted panacea be abruptly trotted out by those in power in the midst of the Euro's existential crisis. As Josef Ackermann subtly intimated, US/UK banks must be salivating over the prospect of the new European Economic Government ATTAC-ing their own already precarious banking system.

I suppose there isn't any great distance from Merkozy to Mitterrand. It was Marx who noted "all great world-historic facts and personages" appear twice, "the first time as tragedy, the second time as farce."

Anonymous said...
11:55 AM  

"If a currency is weaker another is stronger: they cant be all weak"

You can take that to the bank.

btw people/HFs actually pay for such bs?

Anonymous said...
12:22 PM  

New York Fed officials "are very concerned" about European banks. Are we now?

A lil late to the party, are we?

Neverfear, see, if a currency is weaker then another is stronger.

Anonymous said...
12:42 PM  

'C from C',
The Feds worries are misplaced.I stand personally ready to underwrite every European bank..and i expect to have change back from my £20 note.

Anonymous said...
12:47 PM  

Are you "Robin" Leigh-Pemberton?

Anonymous said...
1:41 PM  

A ten-year gilt yield below 2.4%, the lowest recorded for a century, in Germany the ten-year bund yields 2.27% and the Japanese Government Bond rate is 1%.

Also, why does a European bank need to borrow 500 million US dollars from the ECB?

Should I be worried?

Anonymous said...
1:59 PM  

anon 1.41
no, my friends calle me JP senior and the way things are going my ghost incarnate better be available on tap.

'C from C'
says' do not worry my friends this is only our old friend LB taking a piss and banking profits ;) ,or was that pssing profits away I shall have to think about that.

Anonymous said...
2:01 PM  

hows that carry trade going for you's?

Anonymous said...
3:01 PM  

If the Swiss were smart, they'd print actual currency and give it to the Italians and Spanish. But I doubt they have the appropriate sense of humor.


phoenixwoman said...
4:38 PM  

Yes, I just lost a years worth of yield in a few hours, but don't worry mates, there are some great yields out there!

I'm shorting gold for good measure because of imminent deflation. It's going to be cold steel for those clowns who are long gold.

I'm also bearish Treasuries. Why? Well I can't say really... I've been right on everything else so I'm going with my instincts on this one.

1235-1250, we'll be there by Tuesday morning.

Anonymous said...
4:40 PM  

More likely than Economic Armageddon, this is the trading desks of banks delivering a verdict on the European Tobin Tax proposal while simultaneously fellating their own options traders. Can't let those puts expire worthless...

The Philly Fed was an eye-popping number, very interesting, we did check and the state of Pennsylvania doesn't actually yet resemble the economy of Afghanistan during a bad poppy harvest.

Another good day for Rosie fans and Gazza (Shilling, not our old nemesis). Not a good day for JCT after that last idiotic rate hike.

Some kind of pan-European super-fudge, EuroTARP, EuroBond approaching. But first, JCT needs to do a 180 immediately. The € is far too high at these levels for a strong German economy, and even Mangler must see that now. The focus on the last inflation tick is always misguided, results in fighting the wrong war.

Cut and ease this weekend, Tricky. Unless you want Spain, Portugal, Italy and Greece under the fascists and the Colonels again.....

Leftback said...
4:48 PM  

'C from C',
You can call it what you wish and ascribe to it whatever assumptions you wish.The end result is yet another broad market selloff which indicates a lack of confidence in equity risk. A counter trend rally based on yummy yield and cover buying ,but when the shit hits the fan it's gone ..that's the strength ,or in this case lack of it.

As for Rosie...
People like him who attend to the fundamentals are wrong for along time before they usually become right.Their mistake is only that they won't take on the behavioural aspects of the market preferring only a fundamental analysis. However the marketa nd fundamentals do eventually catch up with each other.
What I am saying is it's as wrong to agree with people like Rosie as it is to diagree with him simply because of some fixed view of him.
the markets adaptive and eventually it comes into alignment with the Rosies of this world and as such there is no edge marking them out as some kind of psuedo contrarian indicator.Doing that you'll be right and then you'll be seriously wrong...period.

Anonymous said...
5:26 PM  

Anon @ 4:40, very amusing pastiche. Imitation is the sincerest form of flattery...

Now, why don't you go forth and sell your puts, old chap? We'll have all the Bearish commentators out tomorrow again to cheer you on.

Cheltenham is right, these few days are just noise.

Leftback said...
5:27 PM  

Just to set the record straight, I am a huge fan of Rosie, and he was of course completely correct, as were Reinhart and Rogoff, about the aftermath of balance sheet recessions. The Morgan Stanley retards 4-5% growth forecast and 5% 10y calls of 2010 were totally wrong, as we have pointed out repeatedly here over the last 12-18 months.

However... (deep breath) all of the interventions of the last few years have not been without effect, and deep global deflationary outcomes are now very very unlikely in the absence of central bank/s policy mistake/s of astounding stupidity.

Note that MS and others finally throwing in the towel on growth forecasts this week might be viewed as capitulation.

Leftback said...
5:35 PM  

No weekend rate cut for you!

Soup Nazi said...
5:43 PM  

The interventions have not been in vain .I agree.They did actuallys top complete and utter collapse at that time.What they have not been able to do is to turnaround the behavioural issues thata rise from something like the GFC.
We have clowns running around now pursuing fiscal policies and regulatory manouvres that are changing the landscape from what we need to build form here into something that is going to make recovery a medium term uphill battle.That is what all the economic data from 2011 is telling us. The UK was a most excellent guide for what is happening more generally now dating from May 2010 when the coalition arrived with a brand new policy.
It looks like slow motion car wreck to me and absent some radical about face on policy we're in trouble.
The degree of risk taking out there willing to create expansion and growth is measurable in inverse proportion to the amount of capital flowing into paper treasuries,cash and gold ..it's sad ,but it's indicative of how much money is still looking over it's shoulder at 2008 and saying oh no you won't catch me like that again....that's the behavioural reality of what we are dealing with here.

Anonymous said...
5:59 PM  

Behavioral training is an important factor, for sure, and led to all of the reflex dip buying in equities this Spring. You weren't here then but most of us were out of equities or rotating into defensives.

In the US bond market, Bernanke trained the market with QE2. No formal QE3 is now necessary, b/c we are watching it before our eyes. Anticipation of a QE3 (and a quite reasonable fear of European bond haircuts) led to market participants buying up Treasuries.

As and when global recession concerns ease, investors will be able to take advantage of super low rates for an extended period, and will slowly move out along the risk curve, whether or not the Fed actually announces a new program of asset purchases. We suggest that The World Is, once again, Not Ending.

Leftback said...
6:11 PM  

Come to think of it, the world didn't end in 2008 either, actually a bulge bracket firm simply stumbled and the authorities psychotically decided not to bail it out.

That's what happens in the world of 40x-50x leveraged banks. So if you're ready to risk another 2008 type outcome by all means, the world is not ending, maybe just a European bank or two.

Anonymous said...
6:21 PM  

The role guys like Rosie or Edwards are playing - at least as far as I am concerned - is to bang the drum all day about the LT issues. Rosie has been on this consumer deleveraging (and US turning Japanese) for as far as I can remember reading him (think late 05), same for Edwards and his Ice Age P/E thing.

In the end, they are neither right nor wrong (as in, the point is not to rely on them for investment advice, and I'd guess even they would agree with that), they simply are like a snooze function, where having to hit the button every nine minutes is the only thing preventing you from getting badly asleep at times.

Dublin Dundee Humberside said...
6:31 PM  

This must qualify as the Chart of the Day....

10y Yield Since 1954

We have loved our govies at times these last few years, and may do so again, but right this minute, we think it makes sense to take on some risk.

The comments about 50 x leveraged banks are well taken. Still, 99% of all of the forecasts of Global Banking Crises and Contagions in history never actually occurred, and 2008 was the sole exception.

Anyone talking about a French TARP yet? Politicians in Europe will really be popular if they pair austerity with a bank bailout. Don't rule it out.

Leftback said...
7:20 PM  

C from C
Says' I wouldn't want to hold treasury either,but I love the feel of cash waiting for a real pain moment in the market and what we have had so far is still only tickling..how will I know that excruciating moment has arrived ..presumably when LB buys 10 yrs at 1% ..the ultimate cave in


Anonymous said...
7:36 PM  

Ha ha ha.... so silly. We will not see a 1% 10y.

Not in this cycle.... ;-)

Leftback said...
8:19 PM  

I wonder to myself

If this was the real doom scenario unfolding, shouldn't claims (the ultime coincident indicator) be exploding to the upside already?

Dublin Dundee Humberside said...
8:59 PM  

That Philly Fed number was so bad it feels like they accidentally put the decimal in the wrong place.

I surprised at how sentiment is holding up, buy-dip mentality is alive and well and so I doesn't feel like a bottom. Perhaps too many remember not buyiing the dip last August and missing out.

Nic said...
9:33 PM  

Well I QE-junkies are back, disguised as macro sages, claiming to be more savvy than Soros, sharper than Rosie, more insightful than Pimco's gross, AND calling the bottom weeks ahead of god himself. I love the brits, they give and give, never learnt anything

Anonymous said...
5:51 AM  

'C from C'
I take grave exception to your snide ,purious ,nay I say borderline disrectful remarks.It is only a question of time until we recolonise you and you find yourself back out in the field behind a polughshare once again as genetic superiority once again makes it's presence felt. Be sure we shall leniency howver even though you may a be lower fit only for poaching and shooting of our royal stags.
Furthermore only I 'C from C' may take potshots at LB as onyl I know that one from Cheltenham sould be allowed to hang,draw and quarter a scouser ;)

Anonymous said...
6:39 AM  

Well, the "LB Potshot" indicator has certainly gone off again and I am wondering whether there is a short/twine flush out coming soon. Certainly, gold is looking a bit like Icarus at the moment.

Yet, I must say that 'C from C's advice to keep cash in anticipation of further pain seems the best stance at the moment rather than trying to bottom pick.

The OECD is headed for a recession in my opinion and fiscal bullets are gone so it might get more painful yet, but 2008 ... no, I dont think so. Of course, if a European bank suddenly fails ... well


CV said...
10:13 AM  

just remember, yield hunters:

"they cant be all weak"


Anonymous said...
10:37 AM  

It's always a delight to hear from the various anons, and I thank them for their concerns over my well-being. Quite why I have been chosen to meet the fate of Sir William Wallace has eluded me.

In any case, I trust that we will hear from them just as frequently at a later date, perhaps during a week when gold is falling $50/day. I am sure that will be the case.

We will be back later with another edition of YieldWatch™, not expecting too many changes in the yield on the yellow metal...

Leftback said...
2:51 PM  

'C frm C'
says i think your yield should be safe for awhile as long as the Eurocrats can stay silent. Anyway today should be mainly about banking short covering profit going into the weekend then we get game back on next week when the next economic data has a chance to keep that fear factor humming.
However with the Feddy one back end of the week my best guess is pause in events until the bearded one has pronounced on the juice machine.

Anonymous said...
3:09 PM  

The beatings will continue until morale improves...

Anonymous said...
3:28 PM  

I wonder to myself

It really can't possibly have escaped the gloating Anons that beyond the Eurobank noise, the likes of DVY, NLY, XLU and other usual suspects have actually held relatively well this week, can it?

Dublin Dundee Humberside said...
3:52 PM  

LB is sure nothing escapes the gloating anons.

"Technology company Apple is now worth as much as the 32 biggest euro zone banks.

That's the stark result from a steep fall in the share price of banks including Spain's Santander, France's BNP Paribas, Germany's Deutsche Bank and Italy's Unicredit, compared to a steady rise in Apple's valuation, according to Thomson Reuters data.

Earlier on Friday the DJ STOXX euro zone banks index fell 4 percent, valuing its 32 members at $340 billion. In contrast, Apple's market capitalization has soared to $340 billion.

AAPL/ALL BANK ratio = 1.
Gold/Oil ratio approaching 25.

Things that make you go... hmmmm

Leftback said...
5:59 PM  

C fom C'
Also goes hmmm..
Whilst I can envisage a world where banking shrinks back in terms of it's role and position size within our economy there are limits to such an image.
It is not for nothing that the stock rotational model established since time immemorial postion banking at the very outset of expansionary phases. I leave you to draw the next conclusion for yourselves, but bear in mind that any company that relies on the expansionary cycle taking place,be it Apple or any company,requires that the fuel be in place and of sufficient quantity. Let's reduce this for the sake of the Anons ,people don't just roll up and buy Apple equipment with a pocketful of dosh...typically they require someone to loan them a substantial part of the purchase hence they need what?

I don't know about "beatings" ,the language choice always amuses me.
Far as I am concerned what we have is a radical relaignment of price and growth into a lower where we have established a capitulation low and bounce high and this range is in place. If it can be held sufficiently long and IF the bearded one finds some additional fuel then all I will say is do not be his do not be short in this lower range.

Anonymous said...
6:26 PM  

Sign of the times, ECB Stark forced to come out and explain that the ECB is not a "bad bank." No really, fellows, we're a *good* bank.

Anonymous said...
7:33 PM  

Margin hikes ahead, from the site that shall not be named but is loved by anons....

Margin Hikes Imminent

Where did the anons go...?

Leftback said...
7:48 PM  

C fom C
says' the lack of any notable cover buying after such a strong down week is unusual and not a good sign for next weeks opening so perhaps our anon with the "beatings" may proved to be right on this occasion. I adapt ;)
always when the doggy does not bark

Anonymous said...
8:18 PM  

LB, TMMs etc etc hope you guys didn't get margin calls going long equities till opex, all the anons were too busy settling our profitable shorts; if you haven't received that margin call that's ok, just stick around another week, Ben might get instruction from squiddies and dud to jerk you a bit more at jackson whore next week with a pre-pre-pre qe3 announcement. have fun boozing

Anonymous said...
5:50 AM  

any 1 breathing out there? where have all the LBs gone? farmin ?

Anonymous said...
11:52 PM  

NOT shorting silver I hope? LB was right, after all... just not oobout that WTI Top.

Anonymous said...
12:07 AM  

Is there macro trader out there that can straighten this one out.

Did Asia(today) just give us the tell that we should all be playing catch to the EU-GU , which really haven't moved anyway, any sure enough they've caught a hurry up now.....whats in the tell? is it the forthcoming Jacko? is there circular bids\offer in play now - Asia going to be the drone?.....so global growth comes to a standstill and biding up the EU-GU is going to help? yeah its all relative I know but, it always depends at what level you begin, doesn't?

Anyway, if BB doesn't slap a survivor sticker on wall street for while I'm taking my ball and bat and heading off to the track for the rest of the year.....its going to be a mess.


Ambointhehouse said...
10:35 AM  

Mpettis: China halting, food price rise, Germans shooting their export foot off & rising trade protectionism...

nice, n'est-ce pas?

Anonymous said...
10:48 AM  

3 negative chf libor submissions

Anonymous said...
2:02 PM  

BoJ easing ahead indicated by tighter spreads?:

BoJ to Ease?

I see the Anons have kept the blog busy and readers entertained with intellectual stuff like: "Gold ROOLZ", "Stox BLOW" and "Anything LB says SUXX". That's the kind of quality contribution we enjoy from you, chaps, keep it coming.

Leftback said...
4:12 PM  

LB is generally not that bearish equities, but at the same time we think it might pay to take some risk off if we get a Jackson Hole Bernanke rally/short squeeze this week. Sell hope, buy despair.

Leftback said...
4:45 PM  

Well Stox ROOL n Gold SUXX is back. Anons are generally not that bearish on Gold but at the same time we think it might pay to take some risk off should we get a retrace from this overextended rally/short squeeze (not the WTI to gold gap, Hugo bedtime stories etc.)

Those who are generally bearish on equities appear to be housed under SF Fed (doing some P/E M/O modeling out there) and have names. Otherwise (M/Os aside) this market is clearly broken. We do not pretend to have any idea on how to un-break it / as was the original idea. To those temporarily trapped HFs in the Swissy – our sincere lulz.

If defaults are considered, then firstly default swaps need to be taken count off / given that they hedge zero x/ept the EURUSD, otherwise there's way too much room for a 'nother frickin' “policy mistake”. That’s what DGUF stuff is made of.

Policy mistakes…

If not, well then…

… Just buy the freaking dip.
Or silver. Of BofA bondzzz (aka the Bonnie Mae out of J hole bet).

Anonymous said...
6:30 PM  

Brutal squeeze. These days are always a good opportunity to take a bit off.....

Mr Shorty looks a bit green. Always the same with an unexpected visit to the proctologist.

Leftback said...
8:17 PM  

I consider the market's ability to shrug off all of the ZEW, the widening in peripherals and the Richmond Fed's manufacturing index pretty impressive. I know, I know, strong PMI numbers out of Europe, but should that trifecta come out last week, well I think we would have seen a different outcome, PMIs be damned.

A potential buy the rumour situation developing around J-Hole here? If so, I agree with LB with respect to taking some risk off the table ahead of the speech. Hell, if the gold correction continues, you may see me hanging out with the Anons in Scrooge's vault come Thurs!

WellRed said...
8:19 PM  

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